IR35’s Impact on Private Sector Contractors Leaves Businesses with More Questions than Answers

158217439As more news emerges about how IR35 — a UK tax law that affects independent contractors — will be applied in the public sector, concern grows about if (and how) the law will be applied elsewhere.

The government has made clear its intentions to clamp down on these contractors who are perceived to avoid appropriate levels of tax, and in return make the tax system fairer and more coherent.

Whilst the government is currently implying a lack of appetite for this, signs point otherwise, indicating that the likelihood of this legislation being rolled out into the private sector in one guise or another within two years is strong.

As of April 2017, the responsibility for determining contractors’ employment status within the public sector will now fall on the public-sector body engaging the contractor.

At present, financial liability currently sits with the PSC business directly. In a post-IR35 world, the burden will fall on whomever is paying the contractor if employment status is incorrectly determined. With the recent updates to the legislation however, there is now an obligation making the end user liable for the financial liability if it fails to provide its opinion (to the supplier) on the IR35 status of its contractor. This now has to be given before the assignment actually starts (or before the first payment date, on or after April 6, 2017). This is a deviation from the original proposal where the end user would only have been liable if it failed to supply such an opinion within 31 days of being asked for it.

Under the new legislation, the end user can be held liable if it doesn’t operate its processes for determining the IR35 status with “reasonable care.” It is understood that at present, reasonable care is a pretty intangible term, but it does create concern for end clients on their processes.

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Aside from the concerns that this change will force much needed talent from the market — which we, anecdotally, are already seeing here at MBO UK — businesses are obviously concerned about the added liabilities which the changes will add, as well as the associated administrative burden. In any market it is critical to attract and retain talent, and businesses are now looking at what options they have.

Depending on how risk-adverse particular businesses are, we are seeing some opt for blanket bans on PSC’s and automatically pushing contractors into employed structures. The risk to this is a potential case of “false employment,” and does throw up an interesting question in regards to the reasonable care provision and whether a blanket bans would comply with reasonable care.

HMRC has developed this online digital tool, which is built on a series of questions to provide a definitive answer as to whether IR35 applies or not. It is safe to say that the market’s reaction to its launch has been less than favourable.  This is not surprising. In testing the tool internally, a number of inconsistencies in the tool were found when using it for already established case law.

Even so, some businesses are instead opting to run all engagements through the online tool and deal with it on a case-by-case basis out of an abundance of caution. Others quite simply don’t know what to do and are waiting to see what the wider market does first.

Whilst some in the industry are suggesting that this is too simplistic of a solution to what is a highly detailed and complicated subject, others have been pleasantly surprised at its apparent ease to achieve a status of the assignment being outside IR35 — which in itself has caused more confusion.

Rightly or wrongly, IR35’s development has been based around subjective nuances and case law.

There is also the consideration that a “snapshot” of the role isn’t necessarily how the role will play or how people actually work in practice.

The company paying the contractor could do everything 100% correctly in their process and make their decisions based on the information provided to them at that time. How the day-to-day activities of that role play out may be (and often are) different.

There is one vital element here that needs to be considered. HMRC will have access to the hierarchal structure of the public sector and the inner workings of their classification of roles jobs/bands levels etc. They therefore will already have a good idea if the right to apply SDC (supervision, director or control) is already likely to exist or at least where to target their resources.

This information is very unlikely to be provided in the private sector to this extent, which throws up a number of problems for HMRC.

This is unknown territory for the UK, but through MBO Partners’ international presence we can look at our cousins across the pond for some practical insight. The US market is used to operating under similar legislation and has experience of the challenges involved in ensuring that it operates in a compliant manner, thereby protecting clients and contractors.

Many US companies have tried (and failed) to apply a software-based solution to the problem. It isn’t long before people learn to “trick the system” and understand how the questions need to be answered in order to get the required results. Without ongoing monitoring and physical reviews, how will this be dealt with?

Once a contractor answers the questions and gets confirmation from the software as being outside IR35, how will reviews/audits be carried out? HMRC are then back to their own problem areas such as manpower, spiralling costs, legal costs etc which have all been important factors in the enforcement of IR35 in the first place?

Clarity, it is apparent, is lacking, and we have more questions than answers at this point. We can only promise that we will continue to monitor the news, the latest updates from the government, and keep our clients updated with new news.

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Mark Stringer

Mark Stringer
Mark Stringer is business development director at MBO Partners UK.

Mark Stringer

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